Concerns about the economic, geopolitical, and national security consequences of U.S. imports of oil have triggered arguments for adopting policies to reduce oil imports. Many members of Congress have advocated “energy independence” for the United States.
In their latest study, RAND researchers evaluated several common concerns about U.S. dependence on imported oil, including the likely economic impact on the United States of a precipitous drop in the global supply of oil, attempts by oil exporters to manipulate exports to influence the United States or other countries in ways that are harmful to U.S. interests, and the role of oil-export earnings in supporting terrorist groups. The researchers also estimated the costs of protecting the supply and transit of oil from the Persian Gulf. The study states that some national security concerns about the risks of importing oil are overblown.

The study found that:

• An abrupt and extended fall in the global oil supply and the resulting higher prices would seriously disrupt U.S. economic activity, no matter how much or how little oil the United States imports.
• Oil-export embargoes have been ineffective in advancing the foreign policy goals of oil exporters.
• Oil-export revenues have enhanced the ability of rogue states, such as Iran and Venezuela, to pursue policies contrary to U.S. interests.
• Terrorist attacks cost so little to perpetrate that attempting to curtail terrorist financing through measures affecting the oil market will not be effective.
• The United States might be able to save an amount equal to between 12 and 15 percent of the fiscal year 2008 U.S. defense budget if all concerns for securing oil from the Persian Gulf were to disappear.

The United States would benefit from policies that diminish the sensitivity of the U.S. economy to an abrupt decline in the supply of oil, regardless of its import dependence. The United States would also benefit from policies that would push down the world market price of oil by curbing demand or increasing competitive alternative supplies. U.S. terms of trade would improve, to the benefit of U.S. consumers; rogue oil exporters would have fewer funds at their disposal; and oil exporters that support Hamas and Hizballah would have less money to give to these organizations. The United States might also benefit from more cost-sharing with allies and other nations to protect Persian Gulf oil supplies and transport routes. The United States could encourage allies to share the burden of patrolling sea-lanes and ensuring that oil-producing nations are secure.

Andreas Goldthau

P.S. The RAND study was sponsored by the Institute for 21st Century Energy, which is affiliated with the U.S. Chamber of Commerce, and can be found here.

Coase theorem states that when trading in an externality (e.g. a mature legal system) is possible and there are no transaction costs, bargaining will lead to an efficient outcome regardless of the initial allocation of property rights. In practice, obstacles to bargaining or poorly defined property rights can prevent Coasian bargaining. In oil industry, transaction costs are always relatively high because of oil concentration in certain limited countries. Without doubt, the global oil market is more mature than ever, so disruptions of oil exporters caused merely a short period of oil price peak in 2008 but not a fourth oil shock. But biased information still exists massively, including the reserves of oil, proved and unconventional.

The recent aggressive/abrupt activities of Asian national oil firms can be the consequences or relative high costs of biased information in the imperfect oil markets. The book of this post concludes that Governments’ efforts to secure supplies of oil by supporting investments for national firms in exploration and production projects in other countries have not been notably successful. Japan has paid lot of money in past unsuccessful investments; and it would be very likely for China’s cases as well. Also, the book thoroughly accesses the costs to United States, more specifically on U.S. national security: oil revenues are irrelevant for terrorist groups’ ability to launch attacks. However Iraq War was just in the name of anti-terrorism and it has taken a lot for US on defense spending. These evidences show that, as the authors’ suggestions concerning US energy policies, a more transparent oil market is urgently needed to reduce the costs of oil, in economical, environmental and cultural perspectives. In my opinion, a mature market should be established not only for US but in global view on account of all people in the world, because oil is a world issue from the beginning: the countries that possess and produce enormous oil are not exactly the ones that consume these oils.